Risk and Vulnerability: The Forward Looking Role of Social Protection in a Globalizing World ROBERT HOLZMANN The views expressed in this presentation are those of the author and do not necessarily reflect the views or policies of the Asian Development Bank does not guarantee the accuracy of the data presented. THE ASIA AND PACIFIC FORUM ON POVERTY POLICY AND INSTITUTIONAL REFORMS FOR POVERTY REDUCTION This presentation is delivered at the Asia and Pacific Forum on Poverty: Reforming Policies and Institutions for Poverty Reduction, to be held at the Asian Development Bank, Manila, 5-9 February 2001.

Background n Lessons from East Asia crisis n World Development Report n Poverty dynamics and economic mobility n Increasing risks of globalization  calls for new approach to Social Protection which moves from ex-post poverty to ex-ante vulnerability considerations; from safety-nets to springboards  motivated the development of new conceptual framework for SP: Social Risk Management

Social Risk Management Framework: Basic thrusts: n The poor are typically most exposed to diverse risks (natural and man-made) n The poor have the fewest instruments to deal with these risks  The poor are the most vulnerable as shocks have strongest welfare consequences  The high vulnerability makes them risk averse and thus unable or unwilling to engage in higher risk/high return activities

Road Map n Central elements of SRM framework n SP as SRM: Main strategic conclusions n The need of an operational definition of the vulnerability concept n Risk and vulnerability assessments n Crisis management - what have we learnt n Social expenditure review

Central Elements of SRM n Takes account of the multiple sources of risk and their characteristics (such as idiosyncratic and covariant risk) to address vulnerability n Operates with multiple strategies (prevention, mitigation, coping) and arrangements (informal, market-based, public) to deal with risk n Attempts to match the multiple suppliers of risk management instruments (such as households, communities, NGOs, and governments) with key demand groups (formal, informal-urban and informal- rural workers)

Sources and Forms of Risk MicroMesoMacro (idiosyncratic)(co-variant) NaturalRainfallEarthquake LandslideFloods Volcanic eruptionDrought Strong winds HealthIllnessEpidemic Injury Disability Life-cycleBirth Old-age Death SocialCrimeTerrorismCivil strife Domestic violenceGangsWar EconomicUnemploymentOutput collapse ResettlementBoP, financial or currency crisis Harvest failureTechnology or Business failureToT shocks PoliticalEthnic discriminationRiotsPolitical default on social prog. EnvironmentalPollution Deforestation Nuclear disaster

Social Protection as Sector or SRM as Theme SRM SP Redistribution

Risk Management Strategies n Prevention Strategies - to reduce the probability of down-side risk n Mitigation Strategies - to decrease the impact of a future down-side risk –Portfolio diversification –Insurance –Hedging/Risk exchange n Coping Strategies - to relieve the impact once the risk (the event) has occurred

Risk Management Arrangements n Informal arrangements, e.g. –marriage, real assets, mutual community support n Market-based arrangements, e.g. –cash, bank deposits, bonds and shares, insurance contracts n Publicly provided or mandated arrangements –social insurance, transfers in cash and kind, subsidies and public works

Matrix of Social Risk Management (examples)

Strategic Implications Social Protection as a theme n SRM emerges as a theme giving SP an advocacy and analytical role in other sectors –Addressing national shocks (economic crisis, natural disasters, civil strive) –Financial markets –Rural development –Infrastructure investments –HNP and Education

Strategic Implications Social Protection as a sector n Extending the traditional reach of SP –Informal and market-based arrangements –Gender focus and lens –Balancing informal, market-based and public interventions n Rethinking public interventions –Strengthening risk reduction, inter alia Providing equitable and inclusive labor markets Eliminating harmful child labor

Strategic Implications Social Protection as a sector (2 of 2) n Rethinking public interventions –Fostering risk mitigation, inter alia Old age income security Income support for the unemployed –Improving risk copying, inter alia What is the appropriate balance for the three types of coping (needs-based cash transfers, in-kind transfers, subsidies and fee waivers, and public works programs)? How much is enough? - the fiscal issue How can coping assistance help with risk mitigation and reduction?

Vulnerability: A concept in need of definition and operationalization n A main objective of new framework is to move from backward to forward looking approach in poverty reduction n Poverty is not static but dynamic n Welfare position is influenced by shocks and the availability of instruments n A mere ex-post view of poverty does not catch future poor and the effects of risks on current poor

Poverty dynamics

Defining vulnerability n Goal: (i) to allow for an analytically sound but empirically meaningful measurement of vulnerability over time at the individual and group levels (ii) to permit an assessment of the impact of SRM instruments on vulnerability n Literature reveals different definition in economics, sustainable livelihood, food security, sociology/ anthropology, disaster management, the environment, or the health/nutrition literature n Proposal for discussion: v ht = Pr(c ht+1  c)  Pr C ht = c(X h, I h,  t,  h,  ht )

Risk and Vulnerability Assessments n If both the sources and forms of risk matter for poverty, we have to know and understand the main risks to provide appropriate risk management instruments n This suggests a three state approach –an assessment which details, measures and assesses the crucial risks –an assessment of the available instruments –a plan to close the gap, including costing

Dimensions of risk assessment n Top-down approach –macro-view: macroeconomic risks, natural risks, major health risks, security risks –Latin American study n Bottom-up approach –micro-view: what do the poor perceive as the most threatening risks for their livelihood

Economic Crisis Management: What have we learnt from Latin America and East Asia for SP n Financial and economic crisis is a large covariate shock: –if deep and protracted, likely to exhaust risk management capacities of households and capacity of government –family and community arrangements tend to break down –governments are no prepared to handle rising number of needy individuals

Joint WB/IMF/ADB/IADB Study for APEC MoF n Distilling lessons from 6 APEC countries: Chile, Indonesia, Korea, Mexico, Peru and Thailand n Main findings include: n The availability of timely and reliable information on poor and vulnerable groups is critical for the design and implementation of social safety net programs n Pre-crisis planning can contribute to the design of effective safety nets. Planning will include an assessment of risks and target populations together with identification of program instruments, financing and a strategy for reducing or phasing out programs after the crisis

Main findings continued n Ideally, safety net instruments should be in place before a crisis occurs. It is essential that the programs are targeted; provide adequate protection to the poor; avoid creating a culture of dependency among beneficiaries; and are consistent with economic incentives and overall targets of macroeconomic and fiscal policy n Social safety nets should build on existing public programs and mechanisms for targeting and delivery n Transparency and accountability in the design and implementation of programs and in the use of resources are critical to the effectiveness of social safety net programs. n The involvement of NGOs, community groups and religious organizations can be promoted to enhance efficiency and accountability

Social Sector Expenditure Reviews n SRM suggests than an integrated view on social expenditure needed n Poverty Reduction Strategy Paper calls for review of budgetary expenditure n Available reviews insufficient –Government Finance Statistics –ILO Social Expenditure Reviews/ ESSPROS –World Bank Public Expenditure Reviews –Reviews by bi-lateral donors, etc.

SSER n Calls for systematic methodological framework of social expenditure, financing and performance review n Calls for participation of IMF, ILO, other development banks, bilateral donors, etc. n Would provide comparable results, benchmarks for consultants, and institution building in client countries

SSER n Proposed three-layered approach –Identify the scope and structure of a country’s social sector –Monitor the necessity, appropriateness and capability of social sector programs/ interventions to reduce poverty –Evaluate the economic effectiveness of social sector programs and interventions provided or financed by the public sector

SSER n Pragmatic approach –pilot approach: a few countries per region –sequential approach: identification of main programs, and selective follow-ups –qualitative assessments/memorandum items n Learning exercise –cross-country experience/benchmarking/- good and best practice –developing the research agenda n Financing: ???

Concluding remarks n New concept focuses on vulnerability - a dynamic view of poverty. It promises to be more effective for accelerated and lasting poverty reduction n While promising, there ate many open conceptual and operational issues n A coalition is needed between multi- lateral institutions and bilateral donors, national and international research institutions, donor and client countries